Fractional Share Trading
When trading costs were high, it often made sense to buy as many shares as you could afford so that the trading cost per share was reduced. This reduces your cost basis, increasing your potential for more profit when you sell. But now costs are virtually $0, so if you buy one share or 1,000 shares, the cost to buy them is zero. This opens doors of opportunity.
Let’s say that you want 100 shares of the XYZ company. The first opportunity is that you can buy 25 shares of XYZ this week and wait to see if the market goes down later in the week or next month. You can then buy another 25 shares (using a buy limit order) if the price declines. Of course, there is a risk that the price might continue to climb, but that might be good news, prompting me to buy 25 more shares anyway. Once I have 100 shares, I can stop buying. I use this approach frequently.
The second opportunity is to turn off automatic dividend reinvestment. It is admittedly easier to just let automatic reinvesting do its thing. It requires no thought or action on your part. But what if the day that the reinvestment occurs is a day when the prices are up? I would prefer to take the cash dividend and decide when to reinvest and how many of the dividend dollars I want to reinvest or invest elsewhere. Now that trades are $0, I have turned off all automatic dividend reinvestment, except for my grandchildren’s UTMA accounts. Because they hold ETF’s will a smaller number of shares, automatic reinvestment in the six accounts is the easiest approach.
The third opportunity is to buy fractional shares. If a stock is $1,000 per share, and I only have $200 to invest, I can still but a portion of a share. In this example, I could buy 1/5th of a share of stock, or 0.20 shares.
Fractional Share Trading Brokerage Choices
The Balance lists seven “Best Fractional Share Investing Brokerages for 2021.” They say Charles Schwab is the “best overall,” but I disagree. Schwab has limits on the shares you can trade. The Balance also lists Fidelity as “best for investment goals” and Interactive Brokers for “best for active traders.” Fidelity is better than Schwab because Fidelity allows for more than 7,000 fractional share stocks and ETFs. This past week I tested Fidelity’s trading functionality and sold a fractional share of my VM holdings. I worked like a champ. Note, however, that fractional share trading is not currently offered on Fidelity’s Active Trader Pro platform. You have to do the trades on the Fidelity web site.
Here is a series of screen shots that shows how I set up a fractional share order.
Fractional Share Trading to Dip Your Toes in the Water
One other beauty of fractional share trading is that you don’t have to “bet the farm.” Let’s say you would like to start investing in Tesla (TSLA) but you don’t have $730 to buy even one share. You could start by purchasing 0.25 of a share. If the price drops to $600, but another 0.25 share, and so on.
The Balance article starts by saying, “If you want to invest in the stock market, you might be scared off by the perception that you need thousands of dollars right from the start. But that isn’t true. In fact, you can get involved without even buying a whole share of stock at once. With fractional share investing, you can buy as little as $5 or $10 of stock in a single commission-free trade.” – Eric Rosenberg
LINK: The Balance
I tested Fidelity two times. The first test was the sale of a fractional share of VYM. The second order was a test of stock INTC. Because I used a sell limit order, and the fractional share trade is only good for one day, the stock did not sell. I will try again this week.